Bonds

Basing loans on CDS a huge risk for some borrowers

29 Oct 2008

After being forced to make risky loans at low rates during the credit boom, banks are now dictating terms. Their latest twist is the use of credit default swap spreads to price credit lines. That may help get funds flowing. But some borrowers will tap those funds at their peril.

GE’s Pollyanna ratings fail to convince

28 Oct 2008

The conglomerate enjoys tripleA ratings but markets don t seem to care. Its debt trades at low investment grade levels and its credit default swaps are in junk territory. That s partly due to technical factors. But it also shows how irrelevant ratings have become.

US junk bond market girds for spike in defaults

23 Oct 2008

Half of all US high yield debt now trades at levels that usually indicate a serious risk of default. If past correlations between interest rates and credit risk hold true, it means about $180bn of debt will go toes up in the next year.

US watchdogs’ CDS campaign misses the mark

20 Oct 2008

SEC chair Cox says the credit derivatives market needs more transparency and antifraud scrutiny. Yes, its counterparty risk management and settlement processes should be improved. But regulators mainly need to do a better job of overseeing its participants.

US bank rescue worsens mortgage mess

17 Oct 2008

The government s plan to back Wall Street s borrowings has led investors to dump mortgage bonds in favour of bank debt pushing home loan interest costs up sharply. That should reverse, given time. In the meantime, the US has few options to give home buyers a break.

Day of reckoning for Lehman CDS holders

8 Oct 2008

Financial firms are about to learn how much they stand to gain or lose on derivatives linked to Lehman s credit. Lenders expect to recover little on the bankrupt firm s debt. That s bad news for credit protection sellers. Here s how they ll discover the extent of their woes.

US should ape UK’s medium-term funding guarantee

8 Oct 2008

The comprehensiveness of the UK bank bailout plan makes US efforts look rather ad hoc. Unlike the US, it contains a guarantee for mediumterm debt issuance by banks. That, in conjunction with capital injections, should go a long way toward breaking the interbank lending logjam.

Will Polonius bring down the US economy?

8 Oct 2008

Consumers are starting to heed the advice of Shakespeare s tightwad by cutting back on borrowing for the first time in a decade. Getting one s personal balance sheet in order is a smart move, but on a larger scale, less credit could further damage an already ailing economy.

Fed’s CP fix makes it look more like a bank

7 Oct 2008

The move to buy commercial paper may break that market s logjam. But it will be hard to reverse unless the Fed can convince nervous investors to lend directly again. By inserting itself between lenders and borrowers, it s acting like a bank. That could cause unforeseen trouble.

Credit derivatives risk shrinks – or does it?

25 Sep 2008

The face value of the credit default market actually shrank in the first half of the year, to only $55 trillion. That s a good sign in terms of removing unnecessary tangles from the market. But it doesn t mean there s any less risk being taken.

Rehypothecation mess exposed by Lehman collapse

24 Sep 2008

Lehman used $22bn of hedge funds collateral for its own purposes. This murky practice rehypothecation provided funds with cheap leverage in good times. But they are now in a long line of creditors. The practice should be changed though doing so will raise hedge fund costs.

Pakistan, troubled but perhaps not forsaken

24 Sep 2008

Pakistan s economic situation looked dire before the credit crunch. Now investors are scrabbling for safe havens, Pakistan looks less stable than ever. Default is a possibility, but Pakistan s political distress may actually help it avert that particular disaster.

New York’s credit derivatives plan is flawed

23 Sep 2008

The state wants its insurance watchdogs to oversee CDS. Proper marketwide clearing mechanisms which are in the works would do that more effectively. The New York plan could disrupt credit markets at the worst possible time, and push business out of the state.

Exclusive: JPMorgan squares off with Citadel

18 Sep 2008

A hiring spat, not credit quality, seems to be the reason for the US bank s decision to restrict trading with the $20bn hedge fund. But not everyone passing along rumours is aware of Citadel s raid on JPMorgan staff. The timing looks terrible for such a petty fight.

Lehman contagion hits top-rated borrowers

18 Sep 2008

Regulators hoped the firm could fail without too much pain. But fallout from its bankruptcy hit moneymarket funds and so sucked liquidity out of the $1.8tr commercial paper market, causing borrowing costs to soar. Such unpredictable consequences make the watchdogs' job harder.

Bailout bet batters Lehman bondholders

16 Sep 2008

Investors who held its debt, expecting the government to bail them out even as Lehman s share price plummeted, are nursing total losses over $100bn. Now, with rescues apparently off the table, the cost of debt for troubled firms where it s available at all could rise sharply.

Market right to cast gimlet eye on US credit

10 Sep 2008

Default risk, even after taking responsibility for the GSEs $5.4 trillion of liabilities, remains miniscule. But credit traders think the US is now less of a sure thing. They re right to be sceptical the US could have to pony up more than it hopes to save the mortgage giants.

Options running out fast for Lehman

9 Sep 2008

It needed a capitalboosting deal before reporting earnings, set for next week. Tuesday s 45% stock price plunge suggests investors won t wait even that long. Sure, Lehman shouldn t be at risk of going under. But CEO Dick Fuld may be out of chances to keep the firm independent.

The next nasty surprise for US housing and banks?

3 Sep 2008

Many hope US home prices will recover enough in the next few years to head off mass defaults on the $200bn of option adjustablerate mortgages outstanding. That looks increasingly farfetched. The loans may reset sooner than expected causing a new wave of delinquencies.

Wall Street loses the protection of history

7 Aug 2008

Its woes from SIVs to monolines had already undermined investors trust in track records. Now regulators browbeating of Citi over auctionrate securities means Wall Street will find it harder to use good past performance as a defence when markets hit the skids.